23 July 2020

Nikkei Asian Review: “Sony CEO Yoshida navigates coronavirus and activist attacks”

Its emphasis on recurring revenues has pleased many investors. Sony is the only Japanese electronics company to have surpassed its profit levels [from] before the Lehman crisis. Yoshida knew the company had to become sustainable and continuity in growth was valuable. That is why he made ‘recurring’ a keyword, said Masahiro Ono, an analyst at Morgan Stanley MUFG Securities. I believe this makes him a successful CEO.

Such diversity is more characteristic of a Japanese conglomerate than a Western company, and Yoshida emphasizes the financial value of having a broad portfolio of products with differing life cycles. As well as entertainment, we have businesses to support people, like medical or life insurance. The time scale is long in medical equipment, quite opposite from smartphones. This diversity stabilizes the company.

John Gapper & Jada Nagumo

I was quite surprised to learn a couple of years ago that Sony had a sizeable business in financial services and life insurance – it represented two thirds of Sony’s profits in 2013 at the low point of its post-Lehman crisis. While the company may not be recognized as a global player compared to US tech giants, their long-term strategies of diversity and recurring revenues are increasingly being adopted in Silicon Valley:

  • Apple offers a range of subscription services, from news to music to TV, which are driving revenue growth now that the iPhone market has reached saturation. It also invested in original TV programming and expanded into financial services last year with the launch of the Apple Card;
  • Amazon is heavily invested in TV programming as well, but their most important subscription is without a doubt Amazon Prime;
  • Microsoft is competing with Sony in the gaming market, while extracting sizeable revenues from Office365 subscriptions, though these are more enterprise-focused.
Sony group revenue by unit
Sony breakdown of sales FY2011 vs. FY2018

The irony for Sony is that it is increasingly successful in smartphones -- not as a brand, but as a components maker. The fact that many devices have three or four cameras has raised demand for its CMOS (complementary metal-oxide-semiconductor) sensors so much that Sony is investing more than $900 million to expand capacity by building a new plant in Nagasaki Prefecture. Sony estimated in February that its sensors business would produce more than 1 trillion yen in revenues in the 2019 financial year, and only slightly less in operating profits than its games business.

It was the sensors operation that attracted Third Point to Sony last June, arguing that it was one of the most undervalued large-cap businesses in the world. The hedge fund wanted Sony to spin off sensors into what it said could become a $35 billion stand-alone business, and to focus on gaming, music and films as an entertainment group. Yoshida responded with a strategic review of its assets, but decided last September to hold onto sensors, instead selling off the remaining 5% stake it held in fellow Japanese tech company Olympus.

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